Percentage-based billing (charging a percent of collections or revenue) can be prohibited for Medicare and Medicaid payment arrangements and can violate state fee-splitting rules for commercial claims. Learn what’s risky, what’s illegal in certain contexts, and how to structure compliant billing fees.
What “percentage-based billing” actually means
In a percentage-based billing model, a billing company (or management services organization) is paid a percentage of the practice’s revenue or collections—for example, 5%–9% of amounts collected, or a percent of gross charges billed.
It’s common in the market because it feels “aligned” with performance. The problem is that, in healthcare reimbursement, how you pay vendors can become a fraud-and-abuse issue—especially when government program dollars are involved, and even when they are not.
Why percentage-based billing is a problem in Medicare and Medicaid
1) Medicare reassignment rules restrict paying billing agents based on collections
When a provider/supplier uses an arrangement where Medicare payments are directed to an agent (i.e., reassignment-type mechanics), Medicare rules require that the agent’s compensation not be related to amounts billed or collected and not depend on actual collection.
In practice, a “percent of collections” fee is the opposite of that standard.
2) Medicaid rules also prohibit percentage-based compensation for business agents in relevant payment structures
Federal Medicaid regulations similarly allow payment to a business agent (like a billing service) only if the agent’s compensation is tied to the cost of processing and not related on a percentage basis to amounts billed or collected, and not dependent on collection.
This is why percentage-based billing is frequently described as “illegal” for Medicaid/Medical Assistance claims in many compliance discussions: the model can collide directly with federal Medicaid payment rules depending on how the payment flow/agency relationship is set up.
3) Even when not per se “always illegal,” it is a high-risk structure under the Anti-Kickback Statute framework
The federal Anti-Kickback Statute (AKS) is triggered by “remuneration” intended to induce or reward referrals of items/services paid by federal healthcare programs.
And the AKS safe harbor commonly used for service arrangements requires that compensation methodology be set in advance, fair market value, and not determined in a manner that takes into account the volume or value of federal program business.
A percentage-of-revenue model can be difficult to defend under that framework because it automatically scales with revenue, which can look like compensation that varies with the volume/value of business.
New York is a clear example: Medicaid explicitly warned against percentage-of-collections billing
Some states go further with explicit Medicaid program guidance. New York’s Medicaid program has stated plainly that billing agents are prohibited from charging Medicaid providers a percentage of the amount claimed or collected, and it has tied these arrangements to fee-splitting concerns.
That kind of state-level enforcement posture is a major reason why a “common industry practice” can still be a significant compliance exposure.
“But we only do commercial claims.” Why it can still be illegal (or discipline-triggering) in several states
Even if a practice says, “We don’t bill Medicare/Medicaid,” percentage-based billing can still be prohibited or restricted because many states treat it as fee-splitting or a corporate practice of medicine issue.
Two examples that illustrate the theme:
- Tennessee: its fee-splitting statute addresses dividing professional fees and makes violations a Class B misdemeanor, while also describing limited circumstances where percentage-based compensation may be permitted if reasonably related to the value of goods/services (this is exactly why state-by-state review matters).
- Virginia: its statutes prohibit dividing professional fees in return for referrals and include enumerated exceptions; again, the legal analysis turns on structure and intent.
Separately, legal commentary has long noted that even “private pay only” arrangements can create risk if they influence billing/coding practices that spill into federal program claims.
Bottom line: In multiple states, percentage-based vendor fees tied to professional revenue can be viewed as impermissible fee-splitting (even on commercial claims), or at minimum an arrangement that triggers licensure/disciplinary scrutiny.
Why regulators dislike percentage-based billing (even when the vendor is legitimate)
Percentage-based compensation can create incentives that regulators view as inherently dangerous:
- Upcoding and aggressive billing pressure (because higher reimbursement = higher vendor pay).
- Selective follow-up that prioritizes high-dollar claims over clinical/ethical considerations.
- Blurry lines between billing services vs. marketing/referral generation.
This is why industry guidance frequently cautions that percentage-based billing arrangements elevate fraud-and-abuse risk, even when the parties believe they are acting appropriately.
What to do instead: compliant fee structures that reduce risk
A safer approach is to use compensation that is:
- Set in advance
- Fair market value (FMV)
- Commercially reasonable
- Not tied to collections or reimbursement amounts
Common compliant models include:
- Flat monthly fee (clearly defined scope; change-order process for added services)
- Per-claim/per-encounter fee (not dependent on reimbursement; consider caps)
- Hourly rate for defined tasks (coding edits, A/R follow-up, appeals, reporting)
- Tiered flat fee by volume bands (e.g., 0–500 claims/month, 501–1,000, etc.—tiers set in advance, not percent-based)
- Separate fees for clearly distinct services (e.g., credentialing vs. billing vs. call center), each priced at FMV
And ensure the agreement includes:
- Detailed service description and deliverables
- Compliance responsibilities (coding follows official guidelines; no “maximize at all costs” language)
- Audit rights and documentation retention
- Clear prohibition on contingency/percentage compensation for any federal program work (when applicable)
- A process to adjust pricing prospectively (not retroactively tied to collections)
The MedCycle Solutions recommendation
If your billing vendor is paid a percentage of collections, treat it as a red-flag arrangement—especially if you bill Medicare, Medicaid/Medical Assistance, or any mixed payer book.
MedCycle Solutions can help you:
- Inventory your current vendor compensation models
- Identify which claims/payers create the highest legal exposure
- Restructure agreements into FMV, set-in-advance pricing
- Build a defensible compliance file (contract language, rationale, scope mapping, and oversight)
Compliance note: This article is for general informational purposes and is not legal advice. Because legality varies by payer mechanics and state law, involve qualified healthcare counsel when you restructure vendor agreements.